Wednesday, Jun 27, 2007
Well this is only a surprise to those with an IQ below room temperature (°C)
FT.com: Worries grow about the true value of repackaged debt
As head of the financial stability unit at the Banque de France, Imène Rahmouni-Rousseau travelled to America this month to look at the current turmoil in the US subprime mortgage world. Although initially that had seemed an all-American saga, Ms Rahmouni suspected that French and other European investors also held assets linked to subprime securities. So on behalf of her central bank she wanted to assess the risks. What she discovered surprised her. There was little confidence about how to value the holdings. “Pricing data are difficult to obtain,” she says.
Posted by lvmreader @ 10:05 PM (261 views) Add Comment
16 Comments
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1. lvmreader said...
This is a very important article.
This is because unlike stocks listed on an exchange or US Treasury bonds, CDOs are rarely traded. Indeed, a distinct irony of the 21st-century financial world is that, while many bankers hail them as the epitome of modern capitalism, many of these new-fangled instruments have never been priced through market trading.
Anything like this not marked-to-market is a belief, not a fact. There is no CDO exchange; there is no way for people to know what positions they really have.
Instead, products such as CDOs, which are designed to be held until they mature, have often been valued in investor portfolios or on the books of investment banks according to complex mathematical models and other non-market techniques. In addition, fund managers and bankers often have broad discretion as to what kind of model they use – and thus what value is attached to their assets.
This is so like people boasting at dinner parties how much their house is worth. They never dare put it on the market for fear of having their pants pulled down and their soiled knickers exposed to the world.
So when Wall Street creditors last week threatened fire sales of CDOs seized from the stricken Bear Stearns funds, thus creating a market price for them for the first time, they also threatened to create a wider shock for the system. Fire sales rarely realise anything close to the previously expected value of assets. But if these deals went ahead, they would provide a legitimate trading level that would challenge current portfolio valuations.
Bear Stearns yanked their auction in an awful hurry when the market not only began giggling at the "skid marks" on the underwear, but got a whiff of something distinctly unpleasant too.
2. royston said...
Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha.......Oh my God!........... ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha.........How unbelievably stupid.......... ha ha ha ha ha ha ha ha ha............are the people who bought CDOs!... ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha................The instruments have.... ha ha ha ha ha ha ha ha ha..........no market!......ha ha ha.....and no price!........ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha! {wiping tears from my cheeks}
3. Scott said...
Calm down Royston. Your 30 year apocalypse has not started yet. I am saving you a bottle on ice for when it does.
4. lvmreader said...
In the immortal words of a good Essex based friend of mine and economic commentator
Have it!
5. lvmreader said...
25 Trillion in losses potentially
For the US, this is confirmed in the ratio of personal sector net worth to GDP. Prior to 1995, this ratio tended to fluctuate at about an average of 3.4. Now, despite the paucity of savings in the US economy, the ratio stands at 4.1. A return to the long-run average would imply a fall in US personal net worth of approximately $10,000bn. With similar trends mirrored across much of the world, total global losses from the coming financial meltdown could easily reach $25,000bn to $30,000bn.
6. talking rot said...
Ahh guys. Just who owns CDOs? Is it the Banks? Is it the investment funds that I have my PEPs/ISAs in? Does anyone know the sort of organization or person who buys CDOs and what business they are in?
7. sovietuk said...
"Well this is only a surprise to those with an IQ below room temperature (°C)"
Yes - 5 members of the Bank of England Monetary Policy Commitee.
8. Orwell said...
Ivm Reader, you have a turn of phrase!
9. Hedger said...
Royston,
You are an imbecile. Even if the report is right, it will effrct all of of. Not just everyone but you.
Grow up.
10. sold 2 rent 1 said...
talking rot,
I have just transferred my ISA wrapped unit trusts to a Japanese fund
At 246 GBP/YEN rate. The implosion of the carry trade should ensure decent returns even if Japan's stocks go down in the liquidity crisis.
11. royston said...
Hedger,
What do you mean "...if this report is right"? Are you seriously still in denial..........even with this much evidence? Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha !
12. sold 2 rent 1 said...
Hedger is right Royston.
It is our pensions/investments that will be going down the tube.
13. Hedger said...
30 Trillion is more than the entire issuance, therefore I seriously doubt there will be losses totalling that.
Whether it is right or not, it doesnt change the fact that you appear to have little understanding of the consequences for what you are wishing for. I simply dont see how a downturn of the scale you appear to be hoping for will help anyone. The only reason I can think is that you are so blinded by your arguments that so simplyhavent thought through what it is you are wishing for. House prices will be the least of your worries if it pans out the way you want.
Your lack of objectivity and rationality is making me find fault in all of your arguments........and I came on to this forum because I am actually a bear.
14. royston said...
Guys,
Come on! Haven't you heard of gallows humour? We are all screwed! There is no way out - so, all you can do is laugh of the absurdity of it all and the unbridled stupidity of some of the participants.
15. dohousescrashinthewoods said...
Let's face it, we're all toast. Mathematically, we've all been toast for yonks.
The only comfort (and advantage) now is knowng it ahead of the herd, if not ahead of the insiders.
I see only a couple of options:
1. Liquidate all assets and store them in a non-US, non-UK currency (i.e. somewhere that doesn't have serious, systemic organised inflation).
2. Get a taxi to the airport while your money is still worth something.
3. Move to Brazil, or any other economy founded on physical producion. You'll still get hit by the wash, but a) in those countries you can eat physical food growing out of the ground and b) at least you won't be actually in the coctail bar on the Titanic, laughing about all those silly "real-stuff economies" when the waters close over your ship.
Too extreme? As I have said before, I think there is sufficient risk, many hidden unknowns and cross-linkages, dizzy multiples of leverage - aka fantasy money (case in point CDOs) to say nothing of the extreme global imbalances of China and the carry trade; to build a case for drastic action in the near term.
I don't see how the US and UK can get out of this - they seem to have gone too far up the exponential debt curve and are well past the event horizon (point of no return). The question is "how big", not "if" and I believe the answer increases exponentially with time, alongside their debt.
16. Stoatgobbler said...
Just for good order's sake, there is a massive, liquid global secondary market in debt securities, whether or not they are CDOs, so pricing them is no problem. The issue is what the correct ratings on the debt should be - that's where the variable could be quite a long way from what banks currently think. Like anything, establishing fair value will create winners and losers.
Move to Brazil? WTF?